A new tax avoidance regime is to be introduced which will see advisers offering tax planning products from firms labelled “high risk” forced to abide by new information disclosure rules with the threat of huge fines for non-compliance.

As part of a Treasury consultation published this morning, the Government proposes identifying “high-risk” promoters of tax avoidance schemes with the threat of fines of up to £1m and £10,000 per day in the event those firms refuse to comply with new transparency rules. The rules would require the firm to respond to specific as well as ongoing information requests.

The Treasury estimates 20 firms could currently be categorised as “high-risk” and it expects the new regime to bring in £110m in fines against firms and £130m in tax revenues and penalties against individuals over the next five years.

It says: “There is evidence that many mainstream tax advisers are increasingly unwilling to advise clients to undertake tax avoidance. For those who persist in promoting avoidance, we expect them to be transparent with HMRC about what they are doing and transparent with their clients about the risks involved in undertaking tax avoidance.”

The consultation sets out a two pronged approach for judging whether a firm is a “high-risk” promoter of tax avoidance schemes. The business will be judged against “objective criteria” in its dealings with HMRC and the regulators and a second set of factors which relate mainly to the product itself (see box out below for details).

The criteria firms are judged against will be set in legislation and could include whether HMRC has used information gathering powers against the firm in the past, whether the firm has designed or sold a scheme which “is caught, or appears to be caught” by the General Anti-Abuse Rule and whether the firm is based offshore but has users that are subject to UK tax law.

The second strand of the test will look at whether “all or substantially all” of the promoters business revolves around products whole sole or main aim is to save on tax bills, whether clients are required to keep details of the product secret and if the firm promotes a network of intermediaries to sell its products.

It says HMRC should consider these factors “in the round”. It says: “In certain cases some of these factors carry more weight than others when determining if a promoter is high risk. For example, all of a promoter’s business may be in marketing products but if the promoter complies with Disclosure of Tax Avoidance Schemes obligations this alone would not be significant enough to make the promoter high risk.”

HMRC says the new rules are aimed at improving promoter behaviour with a five stage process for categorising “high-risk” firms, including an appeal process. It hopes that by first approaching firms informally to raise concerns it will nudge firms into changing their practices.

The “high-risk” label could also be applied to individuals as well as firms to stop business moving from a firm which has been put into the category to an affiliated firm which has not.

What makes a promoter “high risk”?

Objective Criteria:

HMRC has used an information power in relation to that promoter or their products

The promoter has failed to notify a scheme under Disclosure on Tax Avoidance Schemes, whether or not there has been a penalty for the failure

The promoter has designed, sold or implemented an avoidance scheme that is caught, or appears to be caught, by the GAAR, or that fails due to the Halifax abuse of law principle

The promoter has breached a voluntary undertaking with HMRC

The promoter is offshore in, for example, a UK overseas territory or a crown dependency, but has users that are subject to tax in the UK

The promoter has been subject to a relevant fine or disciplinary action by a regulatory authority.

Other Factors include:

All or substantially all of the promoter’s business consists of designing, marketing or implementing products whose sole or main purpose appears to be the provision of a tax saving to the user

The products appear to have a limited probability of working because they take an optimistic and unrealistic view of the law or are poorly implemented

The success of the product relies on non-co-operation with HMRC, concealment or mis-description

The economic benefit of the product appears not to be commensurate with the risk

The product results in an amount of income, profit or gains for tax purposes that is significantly less than the amount for economic purposes

The promoter either explicitly or implicitly requires the user of the product to keep details of the product confidential from their other advisers or from HMRC